Analysts bullish on domestic air industry

Tuesday, December 18, 2012

Dahlman Rose & Co. has switched its outlook on the domestic airline industry from cautious to bullish, citing higher passenger and ancillary revenues, the possibility of lower fuel prices and a stability gleaned from domestic airline consolidation.
November, the analysts noted, was the worst month in the current quarter, but the industry is ending the year on the upswing.
One big factor that will affect the domestic market is the proposed merger between American Airlines and US Airways, which Dahlman Rose predicts will occur before the end of the year. The timeline for a merger, the analysts wrote in a recent report, will include regulatory approval in 2013, combining the airlines in 2014 and finally seeing a unified company in 2015.
The dreaded fiscal cliff is a main challenge to the company’s rosy outlook on the domestic airline industry, but they haven't addressed this problem in the industry outlook, believing that a remedy will soon be reached.
“We are choosing to ignore this because we cannot handicap it, and pragmatically, we have to assume the country will get its house in order,” the analysts wrote.
Pilot retirements occurring over the next few years also have the potential of muddying the waters. Boeing has estimated the need for 69,000 new pilots in North America by 2031. Delta, US Airways and United will all experience the retirements of 2,500 to 3,000 pilots in the next few years, the analysts said. Around 10,000 pilots will be retiring in the next five to 10 years.
“This will enable a significant amount of hiring — being a pilot is a good job if you are relatively young — and wage rates that are lower than those of the pilots leaving,” the analysts wrote. “As a result, while we expect overall labor costs to rise over the next few years, we also expect this to be somewhat tempered by retirements.” - Jon Ross